“Economists worry about how legislation affects small-business hiring because companies with fewer than 500 employees account for roughly half of all private-sector employment, the U.S. Small Business Administration reports,” he writes. “Moreover, how legislation affects small-business owners' hiring plans is particularly important now that the vast majority of owners have expressed a reluctance to add workers.”

The three big problems with the deal, as Prof. Shane sees it, are the end of the payroll-tax holiday, higher marginal tax rates on the wealthy and the increase in capital-gains tax rates.

“Therefore, doing away with the payroll-tax cap should eliminate 300,000 jobs,” he contends.

The cliff deal also will reduce small-business job creation by raising the marginal tax rate on the highest-earning Americans, he argues.

“Under the deal, the marginal tax rate on single people earning more than $400,000 a year and married people earning more than $450,000 will rise from 35% to 39.6%,” Prof. Shane writes. “In addition, these earners face a 0.9 percentage point increase in the Medicare tax. The highest-earning small-business owners will be facing a federal marginal tax rate on business income that is 5.5 percentage points higher in 2013 than it was in 2012.”

“Research by economist Robert Carroll (now of the Tax Foundation) and colleagues showed that a one-percent decline in small-business owners' 'net of tax' fraction of income lowers their probability of hiring by 1.2%,” according to Prof. Shane. “Therefore, the tax increases that wealthy small-business owners now face should translate into a 6.6 percent decline in their probability of hiring.”

Preparing for a new era

Ohio slipped substantially in a report that ranks states on, among other things, technology, globalization preparedness and entrepreneurship, according to this analysis from The Akron Legal News.

The state fell to 32nd from 25th in the 2012 State New Economy Index, which is published every two years. The report uses 26 indicators that are divided into five key areas that “best capture what is new about the new economy.” Those areas are knowledge jobs, globalization, economic dynamism, the digital economy and innovation capacity.

Ohio's 2010 ranking of 25th was its highest in the five reports released since the project began in 1999, The Akron Legal News notes. Massachusetts has ranked first each time.

The report notes that for the United States to be competitive in the global marketplace, “one key will be to compete more on the basis of innovation and entrepreneurship and less on cost,” according to the Akron paper.

It says success means “among other things, having a work force and jobs based on higher skills, strong global connections, dynamic firms, including strong, high-growth startups, industries and individuals embracing digital technologies and strong capabilities in technological innovation.”

The report also notes that many Midwestern states have depended on natural resources or on mass-production manufacturing and “relied on low costs rather than innovative capacity to gain competitive advantage. But, in the new economy, innovative capacity (derived through universities, research and development investments and entrepreneurial capabilities) is increasingly the driver of competitive success.”

Struggles continue

Yearly pay raises that workers at small businesses used to count on “have become a casualty of the weak economy,” the Associated Press reports.

“They're increasingly based on performance — not just an employee's performance, but the entire company's,” according to the AP. “Raises at many businesses are also smaller than they were before the recession began five years ago. And some employers are using rewards other than annual raises to compensate workers.”

An analysis by the payroll company Paychex found that the average monthly paycheck at small businesses in November was 1% larger than it was a year earlier. In April 2011, by contrast, “the average paycheck was up 3% from April 2010,” according to the AP. (Paychex bases its numbers on pay at more than 500,000 companies.)

Raises were likely higher in early 2011 because companies were compensating employees for pay that was frozen or cut during the recession, says Frank Fiorelle, the senior director of risk management at Paychex.

The AP adds that pay “is down at the smallest companies,” according to Michael Alter, CEO of SurePayroll, another payroll processor. The company has 40,000 clients with an average of seven employees each, and the average paycheck was down 1.4% in 2012.

Head in the clouds

The Wall Street Journaltakes a look at whether the promise of cloud-based services actually is helping small businesses save money.

The conclusion? In some cases, yes, but, cloud-based services come with pitfalls.

“There's nonstop chatter, often funded by the cloud-service industry itself, about the new world of the cloud, in which businesses outsource their computing muscle to a third party,” The Journal reports.

“For many small businesses that have used the cloud for a few years, the experience has largely been positive, but not without drawbacks,” the newspaper notes. “Cloud services run by companies like Google, Amazon, Microsoft and Dell attract entrepreneurs because of their convenience and low startup costs. But some customers complain about security measures and entrepreneurs' lack of control over data.”

It's certainly a lucrative business. U.S. small businesses spent $3.5 billion on cloud technology in 2011, up 41% from the $2.2 billion spent in 2010, according to a report by International Data Corp., a technology research firm, the story reports. In 2012, spending on cloud technology was projected to increase by about 25%.

Data housed in the cloud is stored and processed in centers hundreds or even thousands of miles away from a company's headquarters, The Journal notes. “While this lets entrepreneurs decide how much storage and processing power they need, it can also be an added frustration for business owners,” since companies do not have direct control over all their data.

“The future of IT for small businesses will largely rely on both servers on site and in the cloud,” The Journal concludes. “Some small businesses have found using a hybrid of both to be beneficial by backing up data on site and in the cloud. IT costs can be particularly a heavy burden on small businesses, because they don't have the deep pockets of large corporations.”

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